Economic Integration in the Caribbean Community: A Problem of Institutional

Adjustment
Author(s): Glen W. Atkinson
Source: Journal of Economic Issues , Jun., 1982, Vol. 16, No. 2 (Jun., 1982), pp. 507-513
Published by: Taylor & Francis, Ltd.

Stable URL: https://www.jstor.org/stable/4225191

REFERENCES
Linked references are available on JSTOR for this article:
https://www.jstor.org/stable/4225191?seq=1&cid=pdf-
reference#references_tab_contents
You may need to log in to JSTOR to access the linked references.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Taylor & Francis, Ltd. is collaborating with JSTOR to digitize, preserve and extend access to
Journal of Economic Issues

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms
 JeI JOURNAL OF ECONOMIC ISSUES
Vol. XVI No. 2 June 1982

Economic Integration in the Caribbean

Community: A Problem of
Institutional Adjustment

Glen W. Atkinson

The process of regional economic integration in the English-speaking

Caribbean is tied to the process of decolonization and political indepen-
dence.' Movement toward independence and regionalism began in the
post-World War II period as the British Empire was breaking down. It
was recognized that small territories with the colonial plantation legacy
could not survive, let alone prosper, without some sort of regional inte-
gration. It was believed that the common language, British political and
social institutions, and support of the former colonizers would make the
task of regional integration a reasonable objective. Thus, these island
territories faced the tasks of nation-building and development of regional
institutions simultaneously.
Notwithstanding these favorable factors, colonial society, and par-
ticularly colonialism structured on plantation production, was not the
most appropriate basis for the molding of national or regional institu-
tions. Plantation production established economic linkages between the
host country and the metropole rather than within the host country. Fur-
thermore, the linkages were not between territories of the region because
they were all producing similar tropical agricultural products for export,
mainly sugar. Tourism is the other major export. The result is technically

The author is Professor of Economics, University of Nevada, Reno. This article

was presented at the Annual Meeting of the Association for Evolutionary Econom-
ics, Washington, D.C., 28-30 December 1981.

507

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms
508 Glen W. Atkinson

backward production techniques, and extremely open economics. Open-

ness results not only from the techniques of production, but from the ex-
tremely small size of the economies involved, and from the fact that they
are islands. It became obvious that political independence would not re-
sult in economic independence. Moreover, production had to be trans-
formed in order to develop the linkages necessary for regional economic
integration and a reduction in economic dependence.
The first independent countries in the region were Jamaica, Trinidad
and Tobago (1962), followed by Barbados and Guyana in 1966. Most
recently, Belize and Antigua gained independence, in the fall of 1981.
Several of the countries are still "Associated States," meaning they are
dependent on Great Britain in foreign policy. Monteserrat is a Crown
Colony. This is a short period and a curious mixture of political status in
which to expect effective national institutions, let alone regional institu-
tions, to develop.
Prior to the first independent state, the West Indies Federation was
established in 1958 with the encouragement of the British. The Federation
was an attempt at political as well as economic integration, and failed
when Jamaica withdrew in 1962. This left a feeling of mistrust, especially
between the two most powerful members, Jamaica and Trinidad/Tobago.
A less ambitious organization, the Caribbean Free Trade Association
(CARIFTA), was formed in 1968. Guyana, which was not in the Fed-
eration and thus not subject to the mistrust generated by that failed at-
tempt, led in this movement. Basically, CARIFTA allowed free trade of
goods within the region, as well as regional cooperation in other matters.
It was an attempt to overcome the problem of the smallness of the indi-
vidual units, and to build a market based on the 4.5 million people in the
region. CARIFTA failed to take sufficient account of the situation of
openness and dependence and the problems of poles of growth and stag-
nation within the region. In 1970 the Caribbean Development Bank was
established with extra-regional participants to provide social overhead
capital on a regional basis, recognizing the problem of polarization. The
lesser developed countries (LDC's) of the region argued that regional
free trade benefited only the more developed countries (MDC's), which
already had an industrial base.2 Thus the LDC's pushed to deepen inte-
gration and force the industrial base to spread across the region.
After extended negotiations, the Caribbean Community and Common
Market (CARICOM) was formed in 1973. Some of its main provisions
were the establishment of a common external tariff, a fiscal harmonization
agreement to limit tax holidays granted to investors, and a tax-sparing
agreement to prevent double taxation from the MDC's in the LDC's. The

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms
 Caribbean Integration 509

Caribbean Investment Corporation was formed with pledges by the pri-

vate sector, as well as public funds. The CIC was to supplement the Carib-
bean Development Bank by providing equity funds for investment projects
in the LDC's. The CIC was undersubscribed and is now virtually defunct.

The Problem

It is generally accepted that economic development requires a struc-

tural transformation of the economy to achieve self-sustained growth
rather than just an increase in per capita income. The purpose of the
transformation is to emphasize the self-sustained aspect of growth, or to
reduce dependence by institutional development, which allows more local
control over the economy. The elements of the transformation are a re-
duction in dualism, elimination of surplus labor and subsistence produc-
tion, and an increase in the share of manufacturing in the Gross Domestic
Product. The volume of inter-industry transactions increases, the ratio of
imports to Gross Domestic Product falls in the long run, and the economy
not only becomes more diversified, but more flexible and adaptable as a
result of underlying political, social, and institutional change.3
According to William Demas, an economist influential in the Carib-
bean integration movement, economic development literature has tended
to concentrate on the transformation process of large underdeveloped
countries. The process is more formidable for small countries, and re-
gional integration is seen as a means to assist. However, the model of the
European Economic Community using static neo-classical analysis to
emphasize improved efficiency through gains from trade, less trade di-
version, is not adequate for the goals of CARICOM.

The main concepts required in an analysis of the effects of integration

among such countries are economies of scale, external economies, and
polarization. The static allocation of resources through trade diversion
and trade creation, effects on competition, and terms-of-trade effects are
largely irrelevant, if not positively misleading. The neo-classical analysis
pays attention only to economies of scale among these factors.4

Moreover, trade diversion could be beneficial, by contributing to re-

gional import substitution, while trade creation could harm the region
since it could destroy local production capacity through competition.5 In
fact, Demas argues that "the value of regional economic integration in
terms of development patterns is that it makes possible a strategy of de-
velopment based on import substitution rather than export creation and
therefore a less 'dependent' pattern of development."6 Demas concludes

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms
 510 Glen W. Atkinson

that the real benefit of integration should be "the stimulus to new invest-
ment arising from prospects of achieving economies of scale and external
economies."7 Because the resource base of small countries is skewed and
demand is diversified, the regional economy will remain more open than
large developing countries.8 Thus, the institutions will have to adapt to
insure that forthcoming investment is largely influenced by locals rather
than foreigners so that the linkages are established and maintained within
the region rather than with the metropolitan countries.
On the other hand, Clive Thomas of the University of Guyana holds
that CARICOM has simply enlarged the market for new colonial pene-
tration.9 He argues that given the weak commitment to integration and
the diversity of political ideology among the countries, the best alterna-
tive is for Guyana to close itself off from world trade and to develop its
own consumption patterns, which can be used for an export base at a
later stage of development. Thomas was one of the early proponents of
regional industrial programming to develop the necessary linkages to
reduce polarization and dependence. He seems to have given up on the
alternative and has adopted the Tanzanian model instead.
It is true that regional institutions housed in the CARICOM Secretariat
are much too weak to provide the flexibility needed to forge the trans-
formation suggested by Demas.10 The weakness of the Secretariat is largely
attributed to the decentralized structure, which gives the Secretariat "no
decision-making power, and its authority is strictly intergovernmental.
... Moreover, each country has veto power in the Common Market Coun-
cil, and implementation is left to individual countries."" Under the cir-
cumstances, it is impossible to create flexible and adaptive regional insti-
tutions. Some of the MDC's have investment codes that attempt to define
the scope of foreign investment, but recent developments in Jamaica and
Guyana suggest that national policies are weakened by foreign exchange
problems.
The combined effect of free trade within the region without free move-
ment of resources and the relatively low common external tariff is to ex-
acerbate the probJem within the region of poles of growth and poles of
stagnation, which weaken region bonds and bargaining strategy with the
rest of the world. The major tool with which to influence foreign invest-
ment at the regional level, other than the common external tariff, is the
Fiscal Harmonization Agreement, which ties income tax holidays and
customs exemptions for producer goods to expected regional value-added.
However, this agreement is implemented by national governments with-
out any monitoring authority by the Secretariat. There is no effective ad-
ministration at either the regional or national level to ensure that actual

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms
 Caribbean Integration 511

value-added is equal to expected value-added. More importantly, there is

no procedure to encourage production linkages with other regional part-
ners.
In fact, there are generous customs exemptions for intermediate pro-
ducer goods, and enclave industries receive the maximum tax holiday.
There may be short-term reasons for these last two measures, but their
existence requires additional efforts at the regional level to forge the de-
sired linkages. With the failure of the CIC, the most reasonable alternative
is regional industrial programming, which cannot be pushed through the
Common Market Council because of opposition from the private sector.'2

The Prospects

In terms of economic integration, the objectives of CARICOM are:

(i) the strengthening, coordination, and regulation of the economic and

trade relations among Member States in order to promote their ac-
celerated, harmonious, and balanced development;

(ii) the sustained expansion and continuing integration of economic ac-

tivities, the benefits of which shall be equitably shared taking into
account the need to provide special opportunities for the Less De-
veloped Countries.

(iii) the achievement of a greater measure of economic independence

and effectiveness by its Member States in dealing with third coun-
tries, groups of states, and entities of whatever description.13

The question is, What is the role of economic theory in designing the
institutional structure to realize these objectives? Economists working in
the tradition of John R. Commons recognize that collective action can
restrict, expand, and liberate individual action. Moreover, this is true if
the individual units are developing national institutions, or if the units are
nations involved in a regional integration movement. There are those who
argue that the third world must rely more on the market for development,
but the market presupposes stable institutions.'4 Alexander Field has
noted that economic choice analysis does not prepare the economist to
model cooperation and activity in groups, and is especially weak in ex-
plaining the initial decision to form groups.15 He is critical of those who
would explain the choice of institutional structure as resulting from some
logically pre-conceived process of short-term maximization, given tech-
nologies, initial endowments, and preferences.'6 Economic integration is
a means of transforming the endowments; thus the institutional structure

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms
 512 Glen W. Atkinson

is not endogenous, but should not be beyond the scope of economic in-
quiry.
Rules are based on historical experience, and must be stable for us to
work out our expectations in the price system. A stable rules structure
precedes a responsive price system.17 In terms of the development process,
however, the transformation requires flexible and adaptive institutions.
There seems to be a paradox in that both stable and flexible institutions
are needed. But only strong institutions are likely to be able to provide
both stability and flexibility. At the present time CARICOM does not
have the required organizational strength to assist in the transformation.
Kenneth Hall and Byron Blake explain the weakness as follows:

The constraints upon the emergence of CARICOM derived not merely

from the legacy of past efforts at integration but were closely related to
institutional structures in the Member States, in which areas of govern-
ment activity were divided into various portfolios for administrative pur-
poses. The tradition of portfolio independence made the creation of a
new regional institution fraught with the danger of conflicts among com-
petencies. These would undoubtedly have had an adverse effect on ad-
ministrative receptivity, as regional integration should have little or no
direct impact on the internal administrative structure of government. Po-
litical considerations in some countries reinforced this reluctance to adapt,
as well as the general feeling that if the movement should collapse, there
would thus be no adverse effect on the normal operations of govern-
ment.19

In short, there has not been a sufficient commitment to integration, and

one can expect a gradual withering of regionalism and growth of na-
tionalism.

Notes

I. The members of CARICOM are Antigua, Barbados, Belize, Dominica,

Grenada, Guyana, Jamaica, Monteserrat, St. Kitts-Nevis-Anguilla, St.
Lucia, St. Vincent, Trinidad and Tobago. All but Belize and Guyana had
been members of the West Indies Federation. The Bahamas, although a
member of the Caribbean Community, is not a member of the Common
Market, and is not discussed in this paper.
2. Barbados, Guyana, Jamaica, and Trinidad and Tobago are designated in
the Treaty as More Developed Countries. The other eight countries are
designated Less Developed Countries and are allowed more leeway in
conforming with the provisions for integration.
3. William G. Demas, The Economics of Development in Small Countries
with Special Reference to the Caribbean (Montreal: McGill University
Press, 1965), p. 20.

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms
 Caribbean Integration 513

4. Ibid., pp. 86-87.

5. W. Andrew Axline, Caribbean Integration: The Politics of Regionalism
(New York: Nichols, 1979), pp. 18-19, and Demas, Economic Develop-
ment, p. 87.
6. Demas, Economic Development, p. 36.
7. Ibid., p. 89.
8. Ibid., pp. 33 and 47.
9. Clive Y. Thomas, Dependence and Transformation: The Economics of
the Transition to Socialism (New York: Monthly Review Press, 1974),
p.68.
10. An excellent critique of the institutional structure of CARICOM can be
found in Kenneth Hall and Byron Blake, "The Caribbean Community:
Administrative and Institutional Aspects," Journal of Common Market
Studies 16 (1978): 21 1-228.
11. Ibid., pp. 219-220.
12. Axline, Caribbean Integration, p. 103.
13. Article 4, Treaty Establishing the Caribbean Community,Caribbean Com-
munity Secretariat, Georgetown, 1973.
14. Alexander James Field, "On the Explanation of Rules Using Rational
Choice Models," Journal of Economic Issues 13 (1979): 55.
15. Ibid., p. 57.
16. Ibid., p. 52.
17. Ibid., p. 59.
18. Hall and Blake, "Caribbean Community," p. 216.

This content downloaded from

108.30.140.36 on Fri, 23 Sep 2022 14:56:07 UTC
All use subject to https://about.jstor.org/terms